The Psychology of Price

Have you noticed how petrol pumps are priced to the third decimal place?

If petrol goes from $1.999 to $2 per litre that extra .001 cents means that if you purchased 100 litres, it would cost you ten cents more. A mere ten cents!

So why bother pricing to the third decimal place?

Psychology.

Studies have shown that consumers perceive prices to be cheaper if they end in odd numbers such as 95 or 99 cents.

One reason suggested is that we have learned to associate ’99 cents’ with sale prices. Another is that, at a glance, a price that ends in a few cents creates the impression that every last effort has been taken to ensure the product is being offered at its skinniest price.

There is also a theory that, as the eye reads from left to right, we pay more attention to the digits on the left. We know that the whole numbers on the left are the ‘important’ ones so, in our haste, we dismiss those on the right—creating a rounding down effect.

To make a distinction, many high-status brands make a point of using even numbers and display round ‘00’s to differentiate themselves from their more desperate cousins.

When it comes to price, perception is reality.


Price creates expectancy. The same way there is a placebo effect in medicine there can be a placebo effect in pricing. Consumers buying an anti-wrinkle serum for $99 may well expect that cream to be much more effective than the $18 lotion purchased in the aisle of supermarket, even if there is no real scientific evidence to back it up.

Our perception of a product or service creates ‘price points’. Price points are the points at which demand changes. For example, demand for a bulk standard, no lettuce, hamburger may drop off when it passes the $3 mark. However, demand for a ‘gourmet’ burger may have a price point somewhere between $7.95 and $12.95 depending on the institution that serves it, and its relative merits compared to the rest of the burgers or meals on the menu board.

Price points

Different price points create different perceptions.

There are psychological price points e.g. $9,999 looks a lot less to the purchaser than $10,000.00. As a general rule when you are the vendor, and you want to make the cost look minimal, you compress the number of numbers to as few as possible e.g. $195.

Conversely, when you have a promotion and you are adding in extra bonuses you will want to advertise $100.00’s and $1,000.00’s of dollars extra value—you make the deal look as big as possible by adding in lots of zeroes.

Different price points attract different types of customers. For example, when listing your house for sale online the difference between $499,000 and $500,000 will put your house into two different price bands exposing you to different customers.

Price points occur within industry categories e.g. Used cars $2,000 and under, Cars under $10,000 (often phrased as cars under $9,999). At the top end there are cars ‘$250,000 and above’ which often slip into an elitist category of their own ‘POA’—Price on Asking.

Conveniently, price points may be used to separate customers into categories. Online electronic stores allow you to search for TVs by price bands e.g. TVs $400—$500, $500—$600 etc

In addition, price points can be used as part of a customer acquisition programme. For example, ‘free’ might be the price point that entices the customer into reading a chapter of your book. They later buy the $9.95 book and then attend the $499 training course.

For existing customers, price points can be aspirational. Pandora™ bead lovers well know the different price points for glass beads versus silver or gold beads.

Similarly, once you’ve bought an entry-level Porsche Boxster™ and you have adjusted your price radar to Porsche’s price points, it might lead you on to total commitment in the form of a 911 Speedster™—POA of course! The law of relativity comes into effect, by their standards, an extra couple of hundred grand starts to seem like real value for money.


Flat rates

In some instances, price points can be a marketing point of difference in their own right e.g. the $2 shop or the ‘all you can eat buffet for $14.95’. Prepaid holidays, such as those offered on a cruise or at Club Med, provide consumers with the security, convenience and peace of mind knowing that they have paid for all the food up front and that they are not going to have a budget blow-out later.

In general you can count on two things: People prefer a flat rate, and people don’t like to think too hard. Phone companies know this when they package 60 minute plans, text 2000, anytime minutes, free neighbourhood call plans and the like. Banks, gym memberships, infomercials and insurance companies leverage this when they divide the total owed into repayment plans of ‘just $xx per week or month’.

You can take this a step further and show your customer how minimal the pain will be e.g. ‘Buy this credit card insurance plan for less than $3.00 per week—less than a cup of coffee’.

Studies done in the car industry have shown that consumers are more sensitive to the size of the repayment rather than the duration. Hence, you may find consumers respond more positively to a repayment plan of $99 per month over 48 months ($4752) rather than $129 per month over 24 months ($3096)—the appeal of the lower monthly repayment (and instant gratification) over-ride the better option for the bank balance.

Likewise, in the consumer packaged goods world we have seen manufacturers avoid price hikes, instead reducing the size or volume metrics. Have you noticed how much smaller your favorite candy bar and biscuits have become lately?


Versioning and Bundling

Whenever a new version of software comes out it creates the opportunity to change the price. Not so long ago, you had to pay more for a mobile phone in pink—another example of versioning whereby you provide the ‘same but different’ product and charge a different price.

Bundling is a price strategy that plays to the consumers’ desire to ‘get a deal’. It also makes it hard for consumers to make ‘apples with apples’ price comparisons as the components vary in each package. Computer companies especially like to bundle software, games, printers, modems, headphones and scanners into packages at various price points. Typically: $999, $1,299, $1,599, $1,999 and so on.

Ultimately bundling serves to sort consumers into groups either by price or product.


Your Pricing Strategy

The strategy you adopt when pricing your product or service begins with how well you understand your customer. Is your customer a bargain-hunter or a seeker of ‘the best quality money can buy?’ Will your customer object more to an increase in price or a decrease in quantity?

Psychology does comes into play with respect to how you price your products and services but it is important to remember that putting ‘99’ at the end of your price will not change your business a great deal if you fail to offer your customers good value.

You may choose to offer customers a price ending in an even or odd number, a bundled package, a different version, a flat rate plan or let them pick a plan that suits them, but in the end it is wise to remember the words of the late, great, advertising guru, David Ogilvy when he said: ‘The consumer is not a moron. She is your wife’ [or best friend].



© Jane Francis is the author of 'Price Yourself Right: A guide to charging what you are worth' and 'Price Talks: The Little Book of Price Psychology'. Jane has over 25 years’ sales and marketing experience, including winning awards for creating successful direct marketing campaigns. Jane is available as a Speaker at your next conference or sales meeting, go to www.priceyourselfright.com